Senate Democrats Prepare a Trade War Beyond Trump's Wildest Fantasies

Yesterday, led by Charles Schumer of New York, a group of Senate Democrats unveiled a protectionist trade platform that, as the New York Times put it, "seek[s] to outdo Trump on trade." The platform includes taking unilateral action against our trading partners "independent from...WTO constraints", breaking out of the disciplines of the Government Procurement Agreement, federal government vetting of inward-bound foreign investment on an economic interest criterion, retaliating against currency manipulation, and punishing U.S. companies for offshoring.

As I told the Times, “I’m both saddened and furious that the Senate Dems have jumped on the protectionist bandwagon so fully, with all the rhetorical flourish... As a matter of policy, none of these measures, on any plausible economic theory, would result in improving the circumstances of U.S. workers, addressing inequality, or the socioeconomic challenges specific to the U.S. heartland.” In this post, I'm going to focus less on the intrinsic economic (and social) irrationality of the Dems' proposals and more on the implications for the multilateral trading system, and the risks of a devastating trade war if the proposals were to be ever implemented. First off, as a supporter of the Democratic Party, I underline that what Schumer and his colleagues have come up with is far from official Party policy-yet. As far as I can see, Senators Warren and Sanders, who have in the past spoken out against aspects of trade agreements, like investor-state dispute settlement, that are unbalanced in favor of some corporate interests, have been silent on their colleagues' reversion yesterday to old-fashioned protectionism. Rightly, in my view, in addressing inequality and jobs issues, progressives like Warren and Sanders have focused on domestic policies like taxes, health care and access to education, as well as infrastructure-policies, which will help American firms and workers become more competitive and more capable of facing the challenges of globalization. (In Sanders' case, that's a welcome change of emphasis, as he started out his primary campaign with an overtly protectionist agenda that sounded something like the current rhetoric of Schumer et al.)

So let's start with the Schumer et al proposal for a trade super-prosecutor who will investigate and punish the supposed unfair trade practices of our WTO partners "independent from...WTO constraints." Under the WTO Agreements the US has undertaken not to engage in unilateral trade actions outside the legal framework of the WTO itself. This framework doesn't require that the U.S. go through the WTO to sanction say dumping or unfair subsidization, it only requires that the way in which it is done conforms to the WTO rules on these issues, and it gives a right to other countries to challenge in dispute settlement the US unilateral actions as not in conformity with those rules. So what do the Senate Dems mean by a prosecutor operating outside WTO constraints"? If they intend that the U.S. will freely punish other countries with trade retaliation even where not permitted to do so under the WTO legal framework, well, then those countries will go to the WTO dispute system and get an authorization to retaliate in turn against the US for not respecting the WTO constraints. And that's exactly how you get a trade war (an even more distressing scenario would be that our trading partners wouldn't even wait to go through the WTO process to retaliate, thus imitating the US in breaking down the rules-based multilateral trading system). While bombast about "cheating" may have some effect on Capital Hill, our trading partners may justifiably view the attacked policies as their sovereign right, having never agreed in negotiations to curb or eliminate them, except where ordered to do so by the WTO's dispute settlement organs.

Even aside from whether the super-prosecutor ignores the WTO rules on dumping and subsidies (procedural and substantive) in going after our foreign competitors with punitive duties, the U.S. (and every WTO Member) is bound to follow the dispute settlement procedures of the WTO, where seeking to enforce WTO rules themselves. This goes to the implication of the Senators that the WTO dispute settlement system is toothless in stopping China from cheating on its WTO obligations, and so vigilante trade enforcement is needed. But as the WTO Section301 case clearly indicates, such vigilantism is prohibited under Article 23 of the Dispute Settlement Understanding (DSU): indeed, in that dispute, the US avoided WTO sanction through making a solemn undertaking that US domestic trade law would not be used to circumvent the DSU. Politicians might try to dismiss this as empty legalism-but the consequences are real. If the US breaks out of WTO law to punish our trading partners, they can and will retaliate-and they can do so perfectly legally through authorized retaliation after a victory against the U.S. in WTO dispute settlement.

One objection to this analysis is that, in fact, if one goes back to the Reagan years, US threats of unilateralism, instead of provoking a trade war, actually led to new rules supportive of supposed US interests, for example, the WTO agreement on intellectual property, TRIPs. So isn't it possible the same thing could happen now? The balance of global political economic power was very different at that time, and much more favorable to the U.S. in terms of getting its way. But there was also an at least partly genuine belief that the rules would nudge or push developing countries on the right path to prosperity, and that reforming international trade rules in what was seen as a more economically liberal direction would produce not only benefits for US interests such as pharmaceuticals and high-tech companies and service industries but also a global common good. And that is entirely missing from the Senator's plan-any sense of global interests or concerns-America's role is to protect ourselves against supposedly vicious competition from others, not to show the path towards a better functioning international economic order. They see this country not as leading the global economy but cowering in a bunker, shooting mortar shells at our competitors.(In some parts of the proposal, there is talk of labor and environmental standards but seemingly only in relation to "unfair" competition, not global values).

So where does the super-prosecutor idea come from anyhow? None other than Hillary Clinton, who proposed it in her campaign in the primary. At the time, writing on this blog, I had this to say:

Clinton suggests that we triple the number of enforcement officers and create a prosecutor in chief for international trade violations. This notion is almost comical. It's a kind of absurd extension of Clinton's military intervention mindset to international trade-if only we have enough firepower targeted at other countries, we will make the rules of the game work for American labor....The limits of what the U.S. can and should do on "enforcement" are set by having to play by WTO norms in areas like dumping and countervailing duties, and also concern that aggressive enforcement will result in a strong reaction by the targeted countries, including more challenges to U.S. policies. Even if we do end up slapping more retaliatory duties on imports, are workers likely to benefit? Corporations can take advantage of these trade barriers to give shareholders a break while all along continuing to outsource and replace workers with technology.

But punishing other countries' trade policies outside of WTO rules is just one the bad ideas in the Senators' proposal-albeit one that, as with Trump's steel initiative, has a high risk of triggering a trade war from which U.S. businesses and workers (as opposed to trade lawyers and lobbyists) are certain to lose not win. In further posts, I'll address some of the other proposals. Next up: restricting foreign investment in the United States.

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Senate Democrats Prepare a Trade War Beyond Trump's Wildest Fantasies

Yesterday, led by Charles Schumer of New York, a group of Senate Democrats unveiled a protectionist trade platform that, as the New York Times put it, "seek[s] to outdo Trump on trade." The platform includes taking unilateral action against our trading partners "independent from...WTO constraints", breaking out of the disciplines of the Government Procurement Agreement, federal government vetting of inward-bound foreign investment on an economic interest criterion, retaliating against currency manipulation, and punishing U.S. companies for offshoring.

As I told the Times, “I’m both saddened and furious that the Senate Dems have jumped on the protectionist bandwagon so fully, with all the rhetorical flourish... As a matter of policy, none of these measures, on any plausible economic theory, would result in improving the circumstances of U.S. workers, addressing inequality, or the socioeconomic challenges specific to the U.S. heartland.” In this post, I'm going to focus less on the intrinsic economic (and social) irrationality of the Dems' proposals and more on the implications for the multilateral trading system, and the risks of a devastating trade war if the proposals were to be ever implemented. First off, as a supporter of the Democratic Party, I underline that what Schumer and his colleagues have come up with is far from official Party policy-yet. As far as I can see, Senators Warren and Sanders, who have in the past spoken out against aspects of trade agreements, like investor-state dispute settlement, that are unbalanced in favor of some corporate interests, have been silent on their colleagues' reversion yesterday to old-fashioned protectionism. Rightly, in my view, in addressing inequality and jobs issues, progressives like Warren and Sanders have focused on domestic policies like taxes, health care and access to education, as well as infrastructure-policies, which will help American firms and workers become more competitive and more capable of facing the challenges of globalization. (In Sanders' case, that's a welcome change of emphasis, as he started out his primary campaign with an overtly protectionist agenda that sounded something like the current rhetoric of Schumer et al.)

So let's start with the Schumer et al proposal for a trade super-prosecutor who will investigate and punish the supposed unfair trade practices of our WTO partners "independent from...WTO constraints." Under the WTO Agreements the US has undertaken not to engage in unilateral trade actions outside the legal framework of the WTO itself. This framework doesn't require that the U.S. go through the WTO to sanction say dumping or unfair subsidization, it only requires that the way in which it is done conforms to the WTO rules on these issues, and it gives a right to other countries to challenge in dispute settlement the US unilateral actions as not in conformity with those rules. So what do the Senate Dems mean by a prosecutor operating outside WTO constraints"? If they intend that the U.S. will freely punish other countries with trade retaliation even where not permitted to do so under the WTO legal framework, well, then those countries will go to the WTO dispute system and get an authorization to retaliate in turn against the US for not respecting the WTO constraints. And that's exactly how you get a trade war (an even more distressing scenario would be that our trading partners wouldn't even wait to go through the WTO process to retaliate, thus imitating the US in breaking down the rules-based multilateral trading system). While bombast about "cheating" may have some effect on Capital Hill, our trading partners may justifiably view the attacked policies as their sovereign right, having never agreed in negotiations to curb or eliminate them, except where ordered to do so by the WTO's dispute settlement organs.

Even aside from whether the super-prosecutor ignores the WTO rules on dumping and subsidies (procedural and substantive) in going after our foreign competitors with punitive duties, the U.S. (and every WTO Member) is bound to follow the dispute settlement procedures of the WTO, where seeking to enforce WTO rules themselves. This goes to the implication of the Senators that the WTO dispute settlement system is toothless in stopping China from cheating on its WTO obligations, and so vigilante trade enforcement is needed. But as the WTO Section301 case clearly indicates, such vigilantism is prohibited under Article 23 of the Dispute Settlement Understanding (DSU): indeed, in that dispute, the US avoided WTO sanction through making a solemn undertaking that US domestic trade law would not be used to circumvent the DSU. Politicians might try to dismiss this as empty legalism-but the consequences are real. If the US breaks out of WTO law to punish our trading partners, they can and will retaliate-and they can do so perfectly legally through authorized retaliation after a victory against the U.S. in WTO dispute settlement.

One objection to this analysis is that, in fact, if one goes back to the Reagan years, US threats of unilateralism, instead of provoking a trade war, actually led to new rules supportive of supposed US interests, for example, the WTO agreement on intellectual property, TRIPs. So isn't it possible the same thing could happen now? The balance of global political economic power was very different at that time, and much more favorable to the U.S. in terms of getting its way. But there was also an at least partly genuine belief that the rules would nudge or push developing countries on the right path to prosperity, and that reforming international trade rules in what was seen as a more economically liberal direction would produce not only benefits for US interests such as pharmaceuticals and high-tech companies and service industries but also a global common good. And that is entirely missing from the Senator's plan-any sense of global interests or concerns-America's role is to protect ourselves against supposedly vicious competition from others, not to show the path towards a better functioning international economic order. They see this country not as leading the global economy but cowering in a bunker, shooting mortar shells at our competitors.(In some parts of the proposal, there is talk of labor and environmental standards but seemingly only in relation to "unfair" competition, not global values).

So where does the super-prosecutor idea come from anyhow? None other than Hillary Clinton, who proposed it in her campaign in the primary. At the time, writing on this blog, I had this to say:

Clinton suggests that we triple the number of enforcement officers and create a prosecutor in chief for international trade violations. This notion is almost comical. It's a kind of absurd extension of Clinton's military intervention mindset to international trade-if only we have enough firepower targeted at other countries, we will make the rules of the game work for American labor....The limits of what the U.S. can and should do on "enforcement" are set by having to play by WTO norms in areas like dumping and countervailing duties, and also concern that aggressive enforcement will result in a strong reaction by the targeted countries, including more challenges to U.S. policies. Even if we do end up slapping more retaliatory duties on imports, are workers likely to benefit? Corporations can take advantage of these trade barriers to give shareholders a break while all along continuing to outsource and replace workers with technology.

But punishing other countries' trade policies outside of WTO rules is just one the bad ideas in the Senators' proposal-albeit one that, as with Trump's steel initiative, has a high risk of triggering a trade war from which U.S. businesses and workers (as opposed to trade lawyers and lobbyists) are certain to lose not win. In further posts, I'll address some of the other proposals. Next up: restricting foreign investment in the United States.